December 11, 2017

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Chancery Court Dismisses Breach of Contract and Fiduciary Claims Brought Under an Unenforceable Contract

In Eagle Force Holdings, LLC v. Campbell, No. 10803-VCMR (Del. Ch. Ct. September 1, 2017), the Court of Chancery dismissed plaintiffs’ breach of contract and fiduciary duty claims against the defendant due to a lack of personal jurisdiction over the defendant. Plaintiffs argued the defendant consented to personal jurisdiction in Delaware by entering into the (1) Contribution and Assignment Agreement (the “Contribution Agreement) and (2) Amended and Restated Limited Liability Company Agreement (the “LLC Agreement,” and together with the Contribution Agreement, the “Transaction Documents”), but the Chancery Court found the Transaction Documents to be missing material terms and, thus, held them to be unenforceable.

In 2013, Richard Kay (who controls each plaintiff) and Stanley Campbell discussed entering into a “business venture to market certain medical diagnosis and prescription technology that Campbell had developed” with the principal terms memorialized in two letter agreements. Pursuant to the letter agreements, the parties would form a new limited liability company with (1) Campbell contributing the stock of EagleForce Associates, Inc., a Virginia corporation, (“EagleForce Associates”) and the membership interests of EagleForce Health, LLC, a Virginia limited liability company, (“EagleForce Health”) along with some intellectual property and (2) Kay contributing cash. Each party would have a 50% interest in the new entity. After Kay made cash contributions to EagleForce Associates to keep the company afloat and several rounds of contentious negotiations, Kay and Campbell signed the Transaction Documents without their attorneys present. The Transaction Documents were missing certain disclosure schedules and contained several placeholder provisions relating to the intellectual property to be contributed by Campbell as well as the equity ownership of EagleForce Associates and EagleForce Health. Shortly thereafter, Kay and Campbell disputed whether the signed Transaction Documents were enforceable and Kay subsequently filed suit asserting that Campbell was in breach of contract and in breach of his fiduciary duties. Campbell maintained (1) the Transaction Documents were not sufficiently definitive on several material terms and, thus, invalid and (2) his signatures only served to acknowledge receipt of the latest draft of the Transaction Documents.

The Chancery Court noted, “[i]n this unusual case, a full trial was necessary to resolve the question of personal jurisdiction because whether Campbell consented to personal jurisdiction in Delaware depends on whether Campbell is bound by the Transaction Documents.” For Campbell to be bound by the Transaction Documents (which contained a “consent to jurisdiction” provision) they must be considered valid. Under Delaware law “a valid contract exists when (1) the parties intended that the contract would bind them, (2) the terms of the contract are sufficiently definite, and (3) the parties exchange legal consideration.” The Chancery Court focused its analysis on whether the terms of the Transaction Documents were sufficiently definitive to see if there was an objective manifestation of assent to the Transaction Documents.

After a five-day bench trial, the Chancery Court held that the Transaction Documents were missing material terms that the parties considered essential, and, thus, the Transaction Documents were not enforceable. Specifically, the Chancery Court found that the objective circumstances of the parties’ negotiating history showed that information pertaining to (1) Campbell’s equity contributions, (2) Campbell’s intellectual property contributions, and (3) other individuals’ interests in EagleForce Associates and EagleForce Health were all considered essential by the parties but were incomplete as of signing. As a result, the Chancery Court dismissed the complaint because a valid agreement did not exist and the plaintiffs did not argue that Campbell was subject to personal jurisdiction pursuant to a long arm statute.

Eagle Force Holdings, LLC v. Campbell, No. 10803-VCMR (Del. Ch. Ct. September 1, 2017)

Copyright 2017 K & L Gates

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About this Author

Scott Waxman, Limited Liability Companies, Corporate, Attorney, KL Gates Law FIrm
Administrative Partner

Scott Waxman is a founding partner in the firm’s Wilmington, Delaware office and a member of the firm’s global Management Committee. His practice focuses on organizational and operational issues related to limited liability companies, limited and general partnerships, statutory trusts, and special purpose corporations, as well as general commercial and financial transactions, including structured financings, securitizations, mergers and acquisitions, joint ventures, private equity and hedge funds, preferred securities transactions, insurance premium financing transactions, life settlement...

302-416-7070
Michael F. Bill, KL Gates, mergers acquisitions, transactional lawyer, general corporate matters attorney
Associate

Michael Bill is an associate in the corporate group of the firm’s New York office. His practice focuses on mergers and acquisitions, transactional work, and general corporate matters.

212-536-4048